Oil prices, like the prices of any other commodity, are largely driven by supply and demand. The fact that a significant percentage of the earth’s oil production occurs in areas that are seeing political upheaval and war throws a wrench in the typical supply-demand quotient. This is in part because the volatile situation affects production directly. It also has significant effects on those who buy and sell commodities.
Often, the spike in oil prices during times of conflict in the Middle East or in other oil rich countries like Russia rises more than the actual effect on oil production and distribution justifies. This is in large part because the reactions of those who invest in the commodities play a significant role in the setting of oil prices and they often react strongly to labor disputes, wars, and internal conflicts in the countries that produce oil.
A NASDAQ report quotes Matt Smith, a commodity analyst for Schneider Electric SA, saying this about the reactions of the commodities market to the current situations in Ukraine, Libya and the Middle East:
“(Oil commodities fading is) all about geopolitical tension at the moment. The reality is that even though there are concerns with Russia, we’re still a good distance from seeing any sort of (oil) supply impacted.”
The report also suggests that the world could see a spike in oil prices if Russia is found to be at fault for shooting down Malaysian airliner MH17.
In other words, we don’t really have an oil supply problem yet and likely won’t have the kind of problem that should drive oil prices up for a long time. If the United States and European Union follow through for any length of time on economic sanctions against Russia — the world’s second largest oil exporter behind Saudi Arabia — that could change.
A Business Insider report suggests that while oil prices are currently going down at a steady rate, the escalating ground offensive in Gaza could also cause them to spike. The report quotes analyst Kash Kamal:
“Investors remain engaged to the unfolding situation between Ukraine, Russia and the West, as well as the ongoing Israeli ground assault of Gaza.”
On the positive side, while oil prices may be negatively affected by economic sanctions placed on Russia, Libya — another leading oil exporter — is starting to see conditions stabilize after a lengthy labor dispute has quieted down. Talks with Iran are also improving, offering hope that sanctions could eventually be lifted on another of the world’s significant oil exporters. Of course, investors are still concerned about the conflict taking place next door to Iran as ISIS continues its efforts to take over Iraq and establish a worldwide Islamic Caliphate. Any or all of these conflicts can affect oil prices, which in turn affect the amount everyone pays at the pump.
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